Payroll tax increase hits paychecks, despite fiscal cliff fix

The plan to avert the fiscal cliff, known as the American Taxpayer Relief Act, fails to prevent the increase of a major tax that will affect the majority of American's take home pay. (Source: Wikimedia)

(RNN) - A universal sigh of relief could be heard after Congress rang in the New Year.

A plan to avert the fabled fiscal cliff was reached Jan. 1, just in time to avoid an income tax increase that would affect nearly all Americans.

However, despite avoiding the fiscal cliff, working Americans should still expect to see a decrease in their take-home pay when they get their first check of 2013.

The legislation that kept the country from jumping off the fiscal cliff, known as the American Taxpayer Relief Act, failed to keep a temporary reduction in the Social Security payroll tax. The cut, enacted in 2010, gave earners a 2 percent cut in the amount they paid into Social Security, from 6.2 to 4.2 of approximately the first $110,000 in annual pay.

After the ATRA passed, the payroll tax increased back to the pre-2010 percentage. The increase is expected to affect 77 percent of Americans.

However, the change in your overall tax liability will not simply be a 2 percent increase. Instead, it will correspond to your 2012 cash income level.

The Tax Policy Center, an independent organization that analyzes American tax issues, estimates workers who made between $10,000 and $20,000 in 2012 can expect to see 1 percent less after-tax income, on average. Meanwhile, those earning between $50,000 and $75,000 will take home 1.6 percent less than they did the previous year.

Individuals making between $100,000 and $200,000 in 2012 will see the largest percentage change in after-tax income, with workers taking home 1.7 percent less each pay period.

Both Democrats and Republicans agreed to the payroll tax increase during fiscal cliff negotiations. However, the Tax Policy center claims ATRA saved more than 99 percent of Americans from a federal income tax increase.

ATRA blocked the expiration of many Bush-era tax cuts, and it kept in place the estate tax exemptions (up to $5 million, 40 percent on amount above). It also put off massive federal budget cuts set to begin in January, as well as keeping several tax credits for renewable energy and other industries.

However, ATRA isn't good news for all Americans. Income tax for individuals making more than $400,000 or married couples making more than $450,000 will see their income tax rate increase from 35 percent to 39.6 percent.